2009-09-21-2009-08-06-2009-08-06

Amended Haynesville JV to prepay remainder of 3-year drill carry in exchange for 12% discount.

Amending the terms to its $3.3-billion Haynesville shale deal with Chesapeake Energy Corp., Oklahoma City, (NYSE: CHK) Plains Exploration & Production Co., Houston, (NYSE: PXP) has agreed to prepay the remainder of its three-year drilling carry in exchange for a 12% discount. Plains will pay approximately $1.1 billion up front instead of an estimated $1.25 billion in remaining carried drilling costs that it would have been paid over the next three years under the original agreement. Chesapeake has agreed to maintain a minimum level of activity on the jointly owned Haynesville acreage by drilling a minimum of 150 wells during each of the next three 12-month periods beginning Oct. 1. After closing the amendment, scheduled for the end of September, Chesapeake and Plains will each pay their proportionate working interest costs on future drilling. In addition, Chesapeake and Plains have agreed to terminate a previous joint-venture amendment that granted Plains a one-time option in June 2010 to avoid paying the last $800 million of the drilling carry obligations in exchange for returning the rights to 50% of its Haynesville shale assets to Chesapeake. The original deal terms when announced in July 2008 were for Plains to acquire a 20% interest in Chesapeake's 550,000 net Haynesville shale acres in northern Louisiana and East Texas for $1.65 billion in cash and to fund 50% of Chesapeake's 80% share of drilling and completion costs for future Haynesville joint-venture wells until an additional $1.65 billion had been paid. The 20% interested extended to any additional acres acquired in the play. The adjusted deal value is approximately $3.15 billion. Plains president and chief executive James C. Flores says, "By pre-paying this carry, we unlock potential capital for Plains' other high-quality assets and allow Plains to achieve an appropriate long-term financing structure that correlates with our tremendous Haynesville shale assets. This structure maintains our balance-sheet strength and increases our financial flexibility on a go-forward basis to increase investment in our existing oil and gas leasehold." Aubrey K. McClendon, Chesapeake chief executive, says, "This agreement modification provides substantial upfront capital to Chesapeake, reduces Plains' total investment in the Haynesville, and further aligns the incentives between the partners. The Haynesville joint venture has been highly successful. (The amendment) greatly benefits both companies." Morgan Stanley Research analyst Stephen Richardson calls the prepay a win for Chesapeake. "The amendment to the Plains partnership allows Chesapeake to bring forward cash, improve near-term financial flexibility, and likely capture the benefits of lower drilling costs in the Haynesville." Michael Hall, an analyst with Stifel, Nicolaus & Co. Inc., says, "Getting the money today makes sense to us as it reduces counterparty risk and increases financial flexibility." Hall estimates Chesapeake's net Haynesville leasehold investment is approximately $3,000 per acre following the amendment, "quite a bit below the headline acreage values of 2008."